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Less than half as many private sector workers have access to defined benefit retirement programs through their employer today as in 1975, according to the latest report mapping a steady decline of such programs.
In defined benefit programs—such as the FERS and CSRS systems in the federal government—a benefit is provided by the employer based on a formula involving salary levels and time of service; in contrast, defined contribution programs—such as the TSP in the federal government—involve a savings account into which the worker and often the employer contribute whose value is determined by the amount invested and the investment returns over time.
While federal employees have both types of programs, private sector companies have been shifting away from the former for decades—to be replaced, if at all, with the latter.
The Congressional Research Service found that in 1975, private sector DB plans had a total of 27.2 million active participants, and private sector DC plans had 11.2 million active participants. By 2019, the former number had fallen to 12.6 million even as the private sector workforce grew, while the number in the latter rose to 85.5 million. (The report noted that some private sector workers also participate in both but did not calculate how many.)
A main reason companies made that shift, it said, is that “employer costs are generally higher for DB plans than for DC plans, because the benefit in a DB plan is typically funded entirely by the employer, while a smaller portion of the typical DC plan benefit is from employer contributions.” Also, costs to the employer are more predicable in DC plans and those plans are easier to administer, it said.
From the employee’s perspective, though, “DC plans place more decisions and risk for retirement income on the worker,” it said.
It added that such plans do have the advantages to the employee of being “portable”—employees can take the money with them when changing jobs, either by moving it into a similar plan of a new employer or transferring it into an IRA. That is not always the case with DB plans, it said, where a worker may not stay with the employer long enough to qualify for a benefit and any potential value from the years of work would be lost.
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